Ladies and gentlemen, welcome to BWX Technologies Inc. update call to discuss the announcement of its agreement to acquire Kinectrics Inc. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will conduct a question-and-answer session, and instructions will be given at that time. I would now like to turn the call over to our host, Chase Jacobson, Vice President of Investor Relations. Please go ahead.
Thank you, Demi. Good morning and welcome everyone to today's call. This morning, we issued a press release announcing BWX's acquisition of Kinectrics Inc., which expands our exposure to and enhances our capabilities in the commercial nuclear power and nuclear medicine markets. We also issued a slide deck about the acquisition that includes information about Kinectrics, our strategic rationale, and key financial details that we will reference during today's call. Both the press release and slide deck can be found on the Investor Relations section of our website. Joining me are Rex Geveden, President and CEO, and Robb LeMasters, Executive Vice President and CFO, who will provide prepared remarks and then open the call for Q&A. We ask that you please limit your questions to topics related to the acquisition. On today's call, we will discuss certain matters that constitute forward-looking statements.
These statements involve risks and uncertainties, including those described in the safe harbor provisions found in the investor materials and the company's SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the presentation that can be found on the investor section of the BWX website. I would now like to turn the call over to Rex.
Thank you, Chase, and good morning to all of you. We are excited to announce the expansion of BWX's commercial operations segment with the acquisition of Kinectrics. This combination brings together two leading nuclear companies in commercial power and nuclear medicine. Kinectrics, based just outside of Toronto, 40 mi from our commercial power headquarters in Cambridge, Ontario, where we are conducting this call today, is a strong and growing nuclear services company with a comprehensive portfolio of offerings to commercial nuclear players globally. Under the leadership of its majority owner and operating CEO, David Harris, who will remain with the company, Kinectrics has an impressive history of growth and deep relationships with a diverse base of customers in Canada, the U.S., and abroad, many of which are new to BWX.
As you can see on slide three, Kinectrics's services portfolio covers all stages of the project lifecycle, from front-end safety and licensing and engineering and design services to ongoing maintenance, nuclear materials management, and component replacement through to decommissioning. Kinectrics also has an interesting play in the nuclear medicine market as a provider of isotope irradiation services for lutetium-177 and stable isotopes from which radiopharmaceuticals are ultimately derived. Adding these services, along with Kinectrics's highly skilled workforce and network of specialized nuclear maintenance and services facilities, complements BWX's present offerings and expands our depth in the commercial nuclear power market. It will provide our customers the end-to-end solutions they desire in the commercial nuclear power and nuclear medicine markets. Slide four of the presentation shows the array of complementary BWX and Kinectrics products and services offerings.
This should be compelling to you as investors and to our customers as they look for true long-term partners for life extension support, new plant buildouts, and/or suppliers of difficult-to-produce radioisotopes for novel therapeutic treatments. To set the stage, BWX's current commercial power business is centered around critical reactor components and fuel, which we manufacture and for which we provide inspection, repair, replacement, and maintenance services. We have the largest nuclear equipment manufacturing facility in North America and a skilled workforce with formidable nuclear experience and design capabilities. This has positioned us as a leading supplier of key components and services to the CANDU market and emergent supplier for SMRs and large reactors.
Based on that outlook and our robust backlog, earlier this year, we made the decision to commence a roughly $60 million expansion of our Cambridge manufacturing facility and have continued to look for additional ways to expand our capacity, organically or inorganically, to capitalize on tangible commercial nuclear demand. In that vein, Kinectrics is an excellent fit for BWX, given its highly differentiated portfolio across the nuclear plant lifecycle. You can see in the blue boxes that its focal points are complementary to the positions that BWX occupies. Importantly, this acquisition also adds front-end capabilities such as safety and licensing and plant systems engineering, which provide for earlier customer engagement on new projects, greater presence on key recurring life-of-plant services, and back-end nuclear decommissioning. Said another way, with this acquisition, our channels to market and visibility into new opportunities both improve.
Further, Kinectrics brings field and lab testing capabilities to support transmission and distribution reliability for a highly diverse set of customers. This new-to-BWX service line positions us to help our customers understand and plan for the proliferation of distributed grid architectures necessary for plants that are likely to be built closer to power-hungry assets. This acquisition has compelling industrial logic for BWX, and we expect to experience the long-term benefits of having a more comprehensive end-to-end offering for our key Canadian and global customers. On a pro forma basis, our commercial power business will derive roughly half of its revenue from services, compared to about a third currently, and the other half will derive from components and fuel.
So that means that nearly 75% of commercial power revenue will be from our highly recurring services and fuel product lines, and the remainder from the important area of nuclear component and heavy equipment manufacturing, which is well positioned for expansion driven by ongoing nuclear plant refurbishments and forthcoming new large-scale and SMR buildouts. In nuclear medicine, Kinectrics has an interesting position in the production supply chain of lutetium-177, the most critical and widely used therapeutic isotope today. In harnessing newly built stable isotope enrichment assets, Kinectrics is the largest non-government entity producing commercially scaled quantities of ytterbium-176, the starter material for lutetium-177. Kinectrics also works with irradiation partners, Bruce Power and Isogen, to provide services that convert ytterbium into lutetium through neutron capture, which is the radioactive payload used in lifesaving cancer therapies.
Much like the commercial power combination, the marriage of Kinectrics irradiation services and stable isotope production with BWX's medical isotope processing and nuclear medicine contract manufacturing is a more end-to-end offering for the fast-growing nuclear medicine market. Overall, Kinectrics brings a highly complementary set of businesses across the nuclear life cycle that will create value for all stakeholders. Slide five scores this transaction against our M&A strategy and shows a revenue pro forma for BWX following the acquisition. On our third quarter earnings call in early November, I discussed how Robb and his team look at many M&A opportunities and will remain disciplined as we look for companies that meet our strict M&A criteria. Kinectrics does just that. I've spoken to how Kinectrics aligns with our core competencies and is complementary to our commercial nuclear power and nuclear medicine businesses, enhancing value for both existing and new customers.
I talked about its involvement in the lutetium-177 supply chain, which broadens our portfolio and delivers scale in the nuclear medicine market. Kinectrics's business portfolio generated attractive organic growth even before the accelerating demand we are experiencing today. And of course, this acquisition meets our financial criteria, which Robb will detail. Overall, this is a very compelling transaction for BWX. Following this transaction, commercial operations grows to about 25% of the company's total revenue from just under 20% currently. It expands our presence globally with existing and new customers, thereby increasing our addressable markets in commercial power and nuclear medicine. With that, I will turn it over to Robb to provide commentary on the financial details of the transaction and insight into Kinectrics's growth outlook. And I'll come back with closing remarks.
Thanks, Rex. Good morning, everyone. We are excited about the acquisition of Kinectrics. It's a unique fit that enables BWX to continue to drive significant shareholder value in the years ahead. I'll start with a quick overview of the transaction details. We're acquiring Kinectrics for approximately $525 million, including the assumption of Kinectrics debt, net pension liability, and transaction expenses. This purchase price represents an approximately 14 times acquisition multiple, as we expect Kinectrics to end 2024 with revenue of almost $300 million and just under $40 million of EBITDA and a similar EBITDA margin profile to our commercial power business, which is in the mid-teens. Based on our 2025 EBITDA outlook for Kinectrics, we expect this multiple to quickly de-rate by about one turn. We believe this is an attractive valuation considering the strategic fit of the business, recurring services portfolio, and solid growth outlook.
We expect to close the deal in mid-2025 and intend to fund the acquisition with available revolver capacity on our existing credit facility. Based on these assumptions, we anticipate our pro forma net leverage will be approximately 2.75 times compared to the 2.3 times at the end of the third quarter of 2024 and well within our targeted range of two to three times. Slide seven provides a picture of both the near-term and medium-term growth outlook for Kinectrics. The main takeaway is that Kinectrics's EBITDA growth profile is similar to that of our commercial power business of mid to high single digits over the medium term. As we highlighted at our recent investor day, we are benefiting from secular trends of global energy security, electrification and decarbonization, and an overall growing appetite for novel nuclear applications.
These are the same trends underpinning Kinectrics's growth plan and should position our commercial segment for success over the next few years. On the commercial nuclear power side, there's a global push to increase nuclear power generating capacity. This was highlighted last year by the United Nations pledge to triple global nuclear power generation, which was backed by over 20 countries, and of course, more recently, we have seen the emergence of non-traditional customers, the tech giants of the world, and other large industrial companies pursuing and investing in nuclear technologies, which they believe will help meet their needs for clean, reliable baseload power. In nuclear medicine, the industry continues to see great momentum. Commercialized lutetium-177-based drugs like Novartis' Pluvicto are demonstrating tremendous commercial success, with sales up almost 50% in the last 12 months.
Outstanding patient outcomes for both approved drugs and new disease indications have led to the launch of over 130 clinical trials for lutetium-177-based drugs. This represents a significant potential for Kinectrics and the industry as a whole. As we mentioned earlier, we foresee mid to high single-digit EBITDA growth for Kinectrics over the medium term, with 2025 likely being at the higher end of that range, supporting our expectation of slight EPS accretion in our first year of ownership. We intend to provide more financial detail when we formalize our 2025 guidance. Overall, we believe the financial characteristics of this acquisition create a compelling investment and expect the strategic value to be appreciated by our stakeholders and customers alike. With that, I'll turn it back to Rex for some closing remarks.
Thank you, Robb. Let me wrap up by reiterating our excitement about the acquisition and welcoming the Kinectrics team to BWX. Kinectrics expands our commercial operation segment and exposure to fast-growing nuclear markets. It enhances our product and service offering, improving our strategic position and ability to more effectively serve existing and new customers. With the acquisition, BWX will have a highly skilled global nuclear workforce of nearly 10,000 employees, covering what we believe is the broadest portfolio of nuclear manufacturing, processing, and services capabilities globally. We serve customers in global security, commercial nuclear power, and nuclear medicine markets, all of which are supported by strong secular tailwinds, positioning BWX for decades of future success. And with that, we look forward to taking your questions.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up. And your first question comes from the line of Bob Labick with CJS Securities. Your line is open.
Good morning and happy New Year.
Happy New Year, Bob.
Thanks. So exciting news today. And maybe just start, can you give us a sense? What's the revenue split, at least roughly, between commercial services and isotopes? And then, well, that's my follow-up after that.
Yeah. In terms of the commercial power business, that's about 95% of sales presently, whereas the nuclear medicine market is about 5%. But I would say the 5% is growing quite rapidly from this point forward.
Okay, great. And what, I mean, Rex, you touched on this quickly. So what capabilities and isotopes does Kinectrics supply that you don't? And can this help you get irradiation with your target delivery system in Darlington, or are those going to still be separate events going forward?
Yeah. So, Bob, they're doing ytterbium-176, which I mentioned in the script, which is a stable isotope that you use to produce lutetium-177, which is the isotope of interest for the radiomedicine market. So they've got interesting enrichment capabilities around ytterbium. And the irradiation services are done at the Bruce Power site in a partnership called Isogen, and we don't expect that to change. What that does is adds lutetium to our portfolio. We're not presently selling lutetium, although we've been developing that isotope. So you take what we do, which is actinium, germanium, contract manufacturing for TheraSphere, Tech-99 in the future. And so this adds a very important therapeutic isotope to our portfolio, and I think it's pretty exciting altogether.
Yeah, and I would add that, and then upstream of that, BWX Medical, as you know, processes that material, turns that into active pharmaceuticals. So that whole operation that I know you know about in Kanata, which is sort of the furthest right on that page number four, that's really where we could add a lot of value of upstreaming all that processed ytterbium and lutetium into real products that we can help our customers turn into ultimately drugs. So that far right is BWX Medical focused, and so we just sort of have added downstream capability.
Super. Congratulations. Thanks a lot. I'll get back in queue.
Thank you, Bob.
Next question comes from the line of David Strauss with Barclays. Your line is open.
Hi, good morning. Thanks for taking the question. This is Josh Korn on for David. So.
Hey, Josh.
Hi. Congrats on the deal. So can you maybe speak a little bit about what Kinectrics does with SMRs? So does this add capabilities beyond reactor pressure vessels? Does it modify the strategy of being a merchant supplier, add more customer possibilities, things like that? Thanks.
Yeah. We really see this as a valuable play within the SMR space. The whole project lifecycle, finding the site, doing project integration, design on the front end, they're quite strong on that. So they're really going to add a lot of features there. Then as you actually stand up these projects, you're ultimately going to need some of BWX's manufacturing capabilities. As you know, we've been selected for the actual manufacturing of some of those components. That's a BWX service. Whereas the engineering and test and field services side of ultimate projects will be, again, added through the Kinectrics portfolio. And then on the back end, as you just think about maintenance of those plants, both companies will be strong, but we have a lot of adjacencies.
And then finally, on actually getting that power out to either customers or to a direct site like a data center, you are going to increasingly need that distribution and transmission capability. And so they add that as it relates to SMRs, but just even more broadly. So we're really trying to get ready. As you know, we were selected for the first project here in Canada, which we're really excited about. And Kinectrics is connected to that project as well with the GE Hitachi product that we think is quite a strong offering. We want to get ready for not only that project, but others. So we're trying to create an ecosystem here and fill in as many of the puzzle pieces. So as customers select partners long-term, we sort of have the whole map figured out for SMR designers.
Great. Thank you. I'll stick to one.
Thanks.
Next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.
Hey, good morning, guys. Happy New Year and congrats on the deal. Maybe Rex or Robb, can you just give us the process maybe behind this transaction, why they were selling? Did you guys have a kind of active working relationship or any kind of background or detail there?
Yeah. Can you hear me okay, David? Or Michael, I'm sorry.
Yeah. Yeah, I can hear you.
Okay. Sorry, we just had some interruption on our line. Yeah, so great question. So David Harris, as well as a set of key partners, were looking to transact the business. They've owned it for several years, and frankly, looking at both price as well as where this could end up long-term, they began discussions with BWX and really found us to be a good home, and I think that's for a couple of different reasons, but primary is within the Canadian market, we're really known to be an innovative company. We're looking to have a good relationship with our customers. Those principals also wanted to remain with the business. They still have a lot of legs left in themselves and really see the future combination of bringing a lot of value, so this was a bilaterally negotiated transaction.
Once they felt comfortable with the price and our ability to move quickly, which we did, which was a sort of service to the seller, we were able to quickly get through this transaction. So we really were the buyer of choice, and they were an acquisition that we've always looked at. We really respect their people, their capability, and so when they were ready to transact, we were ready to act.
Got it. That's helpful. And then just a separate follow-up, Robb, on the financials. I think you said the multiple dropped by a turn in 2025. I didn't hear you talk about any potential cost synergies. Are there any that could be potentially additive to margins? And then I guess separately on, I think you had a brief mention in there about free cash flow, but any sort of capital requirements that Kinectrics might need going forward?
Yeah. Great. Thanks for all the questions there. So yeah, as we mentioned, that going in, it'll be a slightly lower than 14 times multiple, and that's a little bit under $300 million of revenue. And you can map through to a little bit less than $40 million of EBITDA over the course of the year. Then we expect that to grow at a high single-digit rate and margins, which is straight in line with our business to grow in line with revenue, which would then ultimately put you slightly over the $40 million. That's how you get it. In those numbers, of course, we're going to be looking for efficiencies to ultimately just add capability for our customers and see where we overlap. And mostly, we see that entity operating separately, and we are not doing this deal to have cost synergies.
Frankly, we're looking to invest in their business. Yeah, we're really looking to invest in this business and have a better compelling offering to our customers. So that wasn't a big factor. Of course, in any deal, right, we look for efficiencies, and we will find those over time. But that wasn't sort of baked into how we get that derating of one turn. That's just natural growth in the business and really just running it the way that BWX runs all its companies.
Got it. Helpful. All right. Thanks, guys. I'll keep it there. I'll jump back in the queue.
Thanks, Mike.
Thanks.
Next question comes from the line of Thomas Meric with Janney. Your line is open.
Good morning, gentlemen. Congrats on the transaction, and thanks for the time. Two for me on the medical capabilities of Kinectrics. First, kind of an update on the second production line at the isotope production system at Bruce. Just curious how that's performed over the past couple of months and if you could comment on any visions you have for that. And then the second is really about how we should think about future isotope production at Darlington and at Bruce. Kind of what do you need from an economic signal to invest in a new line or a new system at those two sites? And just broader question, kind of how do you envision isotope production at these two commercial power reactors over the next several years, whether it's individual isotopes or just expansion of capacity? And that's it for me. Thanks.
Yeah. As it relates to both of those customers, I can kind of deal with them because they're both approaching the market quite similarly. We view our capabilities helping them to do irradiation services at their reactors. We are standing up a second capability, as you said, or Kinectrics and Isogen are setting up a second capability, and that's going to plan specifically to your question. Likewise, I think Darlington, we're standing up our target delivery system, and I think they're looking to perfect that process as well as look at expanding capacity over time. So I think both utilities, I shouldn't speak to them for them, but I think both of them will look to consider that they have really valuable assets there that's really going to help the nuclear medicine market.
And so we're going to maintain both those relationships and try to support both of those customers as they desire to grow. Of course, there's other capabilities of growing outside of Canada, which we'll investigate with our partners. But we really see a lot of good growth even in Canada for irradiation services.
Operator.
Next question comes from the line of Peter Arment with Baird. Your line is open.
Yeah. Hey, good morning, Rex and Robb. Happy New Year. Looks like a great deal. Can you talk a little bit about the exposure to the U.S. nuclear fleet, the 94 reactors? And then it's also mentioned that Kinectrics has some decent international operating facilities. Can you give us a little more color there? Thanks.
Yeah. Peter, hey, good morning and happy New Year to you too. I'll start with that one. Robb may want to add. You look at the revenue breakdown of that business, about 75% of it is from Canadian sources working with the nuclear utilities here in Southern Ontario. The remaining 25% is the rest of the world, of which about two-thirds of that would be in the U.S. Let's call it 15% at the revenue line. And there's a few sites in the U.S. They're really strongest with support to Duke Energy and their ongoing nuclear fleet and have exposure to various other things in the U.S. And so I think we would see it as, Peter, as kind of a toehold for us in the U.S., an interesting starter for exposure to what I hope will become a very exciting market for us down there.
But that's what it is right now. Call it 15% of the total business.
Yeah. I might just add, Peter, that yeah, of course, Canada is actually ahead of the game in a lot of areas, so that's kind of why this business is overweight, and so as the U.S. follows with either different technologies, different form factors, we plan to increase our penetration in the U.S., and so this kind of sets us up nicely to continue to expand, of course, in Canada where they're considering greenfields, refurbishments, SMRs, so Canada's leading, and we think the U.S. will be a fast follower, and we hope to replicate both our manufacturing capability that we have very strong in Canada. We're investigating how to do that in the U.S. We're looking now, of course, through this acquisition to expand our services capability, and so as that market develops, really, we'll be on a good perch to have relationships with the customers and local capability.
We'll just grow as the U.S. catches up, frankly, to Canada.
Appreciate all the details. Congrats, guys.
Thanks, Peter.
Next question comes from the line of Pete Skibitski with Alembic Global. Your line is open.
Yeah. Good morning, guys. Happy New Year. Guys, just sticking to the 95% of the business that's power-related, are there scenarios that you looked at where the growth of the business really accelerated? And as I look at kind of the four power areas that you kind of lay out here on slide seven, is one of those expected to grow more than another and really kind of excite you in terms of the more mid to long-term opportunity set?
I think their whole portfolio has really been growing very nicely over the past couple of years that they're going to finish a strong 2024. When you really look at it, it's across the board because, as you know, there's front-end capability that's going to be growing along with new projects or new siting or new projects that are happening. They have some good integration capabilities. So that's sort of more on the new build or new projects. And then, of course, the recurring business, right, you're just going to want to run your plants longer. So that's also growing nicely. And then on the back end with T&D, people are just expanding in general, not only in nuclear but in other areas. And so we have exposure to that. So I don't think there's any area within commercial nuclear. We'll see how the market evolves.
But we're kind of playing now at every stage of a nuclear plant. And so I really hope that the front end really takes off, which is where we're at with Kinectrics, where they really have a lot of exposure. That'd be really exciting for me. But that's not baked into our assumptions. Our mid- to high-single digits over the medium term really is across the board.
Okay. Got it. Got it. And then just one clarification on the Lutetium-177. So are you going to continue to develop your organic solution for that, or will that end now that you have a solution through Kinectrics?
No. Good question, Pete. So as you think about the chart that we had that showed the continuum on page four, that far right isotope processing and drug manufacturing, that's really where you're turning that material from irradiation either at Bruce or OPG into something of a higher value. That's creation of an API that involves filing a DMF and so forth. That's the effort you're speaking of, to be clear. That is the business of Kinectrics, right, is taking materials, refining it, and making it into products that we can sell to drug companies. We'll continue that effort. And frankly, we add that now. We add that front-end capability to essentially, as we develop the API, there's just more ability to push that through the pipe the way we see it. And so, yeah, no, we'll still pursue the active pharmaceutical component of Lutetium.
Now we just have an additional source of irradiated material, if you will.
Okay. Great. Thanks for the clarification.
Sure.
Next question comes from the line of Andre Madrid with BTIG. Your line is open.
Rex, Robb, good morning.
Morning.
Could you maybe talk to, sorry if I missed this, but the Kinectrics backlog and what's in there?
Yeah. It's very similar to so the backlog would involve. I mean, they do have a services business that's book and bill, but they have $200 million of backlog, right? We talked about their revenue being slightly below $300 million. And so they have $200 million as they look at over the next couple of years. And so they'll burn through that. But it's a book and bill business as well.
Got it. Got it. And then, I mean, as we look at the acquisition, if we could look at nuclear med in isolation, how does this contribute to the long-term financial targets that you guys outlined last year? And I mean, more importantly, if you look at medicine, is this accretive to your existing medical mix?
We do view it as accretive. I think that this is clearly a therapeutic isotope play, right? And as you think about our targets of $200 million of revenue, we've always talked about that being in a couple different components. That involves what we're doing on the diagnostic side in the first case. In the second case, the portfolio that we acquired and have substantially built up at Nordion, as you know, that's gone from a $40 million revenue run rate to in the $70-$80 million range now. That will continue to expand to help us reach that $200 million target. And then the third component, always, we said, was small but growing quite rapidly to hit that. Those were therapeutic targets that are relatively small because the volumes are small and growing. And so that's really where this acquisition plays.
As we said, it's a really small bit of revenue and will be over the next couple of years relative to BWXT as a whole, but that'll grow substantially. I would say it fills out that capability and then some on the therapeutic isotope part of where we ultimately want to take the business and where we've given guidance.
Awesome, caller. Thanks so much, and happy New Year, gentlemen.
Thank you. Happy New Year to you.
Your last question comes from the line again of Michael Ciarmoli with Truist. Your line is open.
Hey, thanks for taking the call, guys. Rex, any direct exposure? I know you mentioned Duke Energy as kind of the most or the biggest U.S. kind of customer, but any exposure to any of the restarts that we've seen or heard about domestically? And then which specific SMR players are they most closely aligned with?
I'd say, Michael, I'll take that, and maybe Robb will add. So what this acquisition does for us in the SMR space is gives us access to revenue on the front end of these projects more quickly. And so we talked about the licensing, safety analysis, support for design certification, and ultimately approval by NRC or Canadian Nuclear Safety Commission. So that's the kind of exposure that will help us a lot in the SMR market. I would say that this company is broadly exposed to that. I wouldn't be more specific than that.
Okay.
Yeah, that's right. And by the way, I'm not sure I characterized Duke as the largest U.S. customer. I actually don't have that right at my fingertips, but other customers such as Entergy, and they have exposure with Hydro One and Atkins. So they have a lot of both Canadian and U.S. exposure. So they're spread out really nicely. And I agree with Rex. We'll see how all those projects develop. As I talked about earlier, we really want a U.S. perch, and we'll see how that market expands to ultimately expand our services capability in the U.S., technology agnostic, frankly.
Got it. Perfect. Thanks, guys.
Thanks, Michael.
That concludes our question and answer session. I will turn the call back over to Chase Jacobson for closing remarks.
Yes. Thank you, everybody, for joining us today and for your interest in BWXT. If you have any further questions, feel free to reach out to us at investors@bwxt.com. I look forward to talking to you soon. Thanks.
Close today's conference call. You may now disconnect.